SINGAPORE (June 30): CGS-CIMB analyst Ngoh Yi Sin is maintaining “buy” on IHH Healthcare with a target price of RM6.25 ($2.03), which is based on an unchanged sum-of-the-parts (SOTP) valuation.

The rating comes after the release of IHH Healthcare’s 1Q20 results on Monday. The private healthcare operator posted a loss of RM319.8 million.

See: IHH Healthcare reports loss of RM319.8 mil for 1Q20

The losses were attributed to the RM400.5 million impairment loss on the remaining goodwill from the investment made into Global Hospitals in India, a RM80 million foreign exchange (forex) loss on net borrowings, and a RM60 million forex loss on substantive liquidation of its joint venture, Khubchandani Hospital, says Ngoh in a report dated June 29.

Excluding these exceptional items, IHH would have recorded an underlying net profit of RM189 million for 1Q20, which is still some 25% of CGS-CIMB’s full-year forecast.

For 1Q20, IHH saw a broad-based decline in revenue and inpatient admissions across all its markets, mainly due to the nationwide lockdowns from the Covid-19 pandemic.

“We project 2Q20F to be significantly weaker on the back of travel restrictions implemented since late-Mar 20 and deferment of non-essential treatments. Within the domestic patient volume in 2Q, [some] 40% of cases were urgent, with the remaining equally split between elective and semi-elective cases (which started to see some recovery in Jun 20),” says Ngoh.

“We also expect more telemedicine, screening and testing services, coupled with patients decanted from public hospitals, to offset some revenue loss,” she adds.

As such, Ngoh has trimmed IHH’s earnings per share (EPS) for FY20F by 9.8% on Covid-19 disruption, and reduced its EPS for FY21F-22F by a slight 0.1%.

“We believe IHH has sufficient financial strength to tide it through the difficult times (0.17x net gearing as of end 1Q20), as it also works to defer its non-critical expansion plans (e.g. delaying the completion of Parkway Shanghai Hospital to FY21F) and further pare down its non-lira debt exposure (€40m reduction in 1Q20),” says Ngoh.

AmInvestment Bank (AmBank) analyst Nafisah Azmi has also maintained a “buy” recommendation on the stock, due to its strong prospects in the private healthcare sector owing to rising affluence and an aging population, as well as its position in the premium segment of the sector.

Azmi has also estimated a fair value price of RM6.58 for IHH Healthcare.

“Our valuation is based on DCF with a weighted average cost of capital (WACC) of 7.0%. We lower our WACC 7.0% from 7.4% to reflect a lower risk-free rate,” says Azmi.

IHH’s 1Q20 core net profit of RM189.4 million was “largely” within AmBank’s and street’s expectations, accounting for some 24% of the brokerage’s, and consensus’ full-year earnings estimates, she says.

While IHH’s 2Q20 performance will remain subdued due to the Covid-19 outbreak as patients delay non-essential and non-emergency treatments, and a general slowdown in medical tourism, Azmi expects patient volume to gradually recover from 2H20.

“In the long term, we expect the group to continue to grow on the back of sustained demand growth in all of its markets, expansion in multiple countries, better operational metrics, and tighter cost controls,” she says.

“Risks to earnings are pricing controls, bigger-than-expected pre-operating and start-up costs of new operations and wage inflation,” she adds.

As at 4.30pm, shares in IHH Healthcare are changing hands 1 cent lower, or 0.6% down, at $1.77.